What are the advantages of LLP over a
private limited company
In
India the existence of a business operated by contract but it is governed by
the principles of Company law. Even the Business also has a great impact on the
global economy too. But before starting lets know a brief about LLP and Private
limited company, what it actually means.
Limited Liability Partnerships
(LLPs) are commercial vehicles which combine the features of partnership and
company form of business .The concept of Limited Liability Partnership
(LLP) has been introduced in India by
way of Limited Liability Partnership Act, 2008 (notified on 31st March 2009).
Though a Limited Liability Partnership combines the advantages of both the
Company and Partnership into a single form of organization. In an LLP one
partner is not responsible or liable for another partner’s misconduct or
negligence. In an LLP, all partners have limited liability for each
individual’s protection within the partnership, similar to that of the
shareholders of a limited company. However, unlike the company shareholders,
the partners have the right to manage the business directly. An LLP also limits
the personal liability of a partner for the errors, omissions, incompetence, or
negligence of the LLP’s employees or other agents. As we all know that LLP is a
separate legal entity, liable to the full extent of its assets; the liability
of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be liable on account of the independent or
un-authorized actions of other partners, thus allowing individual partners to
be shielded from joint liability created by another partner’s wrongful business
decisions or misconduct. But a Private limited company are the type of company that offers limited liability,
or legal protection for
its shareholders but
that places certain restrictions on
its ownership.
These restrictions are defined in the company's by laws or regulations and
are meant to prevent any hostile takeover attempt.
Advantages of Limited
Liability Partnership over a Private Limited Company-
There are a number of reasons why many
entrepreneurs prefer to go in for a Limited Liability Partnership over a
Private Limited Company. It is considered easier to set up, as a rule is
comparatively hassle-free in day to day operations, has significantly lower
burdensome compliance requirements and costs, and therefore many see it as advantageous
to begin their organization in this manner. Let us look at some of the reasons
for this choice and the LLP Advantages.
1. No requirement of
minimum contribution – As against company there is a minimum capital requirement in LLP. An LLP
can be formed with least possible capital. The particulars of Minimum Capital
contribution are 1. Private Company – 1,00,000; 2. Public Company – 5, 00,000;
no such mandatory requirement and moreover, the contribution of a partner may
consist of tangible, movable or immovable or intangible property or other
benefit to the LLP.
2. No limit on owners of business
- An LLP requires a minimum 2 partners while there is no limit
on the maximum number of partners where this is in contrast to a private
limited company wherein there is a restriction of not having more than 200
members.
3. Lower registration cost - The
cost of registering LLP is low as compared to cost of incorporating a private
limited or a public limited company. An illustration can show the approximate
cost involved in formation of private limited company and an LLP.
4. No requirement of compulsory Audit - All limited
companies, whether private or public, irrespective of their share capital, are
required to get their accounts audited. But in case of LLP, there is no such
mandatory requirement. This is perceived to be a significant compliance
benefit. A Limited Liability Partnership is required to get the audit done only
in the case that:-
1. The contributions of
the LLP exceeds Rs. 25 Lakhs, or
2. The annual turnover
of the LLP exceeds Rs. 40 Lakhs
5.
Savings from lower compliance burden - Every year, there are about 8 to
10 regulatory formalities and compliances are required to be duly completed and
submitted by a Private limited company whereas a Limited Liability Partnership
is required to file only two, namely, the Annual Return & Statement of
Accounts and Solvency.
6. Taxation Aspect on LLP - For
income tax purpose, LLP is treated on a par with partnership firms. Thus, LLP
is liable for payment of income tax and share of its partners in LLP is not
liable to tax. Thus no dividend distribution tax is payable. Provision of
‘deemed dividend’ under income tax law, is not applicable to LLP. Section
40(b): Interest to partners, any payment of salary, bonus, commission or
remuneration allowed as deduction.
7. Dividend
Distribution Tax (DDT) not applicable - In the case of a company, if the
owners to withdraw profits from company, an additional tax liability in the
form of DDT @ 15% (plus surcharge & education cess) is payable by company.
However, no such tax is payable in the case of LLP and profits of a LLP can be
easily withdrawn by the partners.
The Limited Liability Partnership act 2008 was
published in the official Gazette of India on January 2009 and has been
notified with affect from 31st March 2009.
• In India, An LLP is treated like any
other partnership firm.
• No partner would be liable on account of
the independent or unauthorized actions of other partners & there is no
joint liability created by other partners.
• LLP shall be a body corporate and a legal
entity separate from its partners. It will have perpetual succession.
• Indian Partnership Act, 1932 shall not be
applicable to LLPs and there shall not be any upper limit on number of partners
in an LLP unlike an ordinary partnership firm where the maximum number of
partners can not exceed 20.
• LLP Act makes a mandatory statement where
one of the partners to the LLP should be an Indian.
• Provisions have been made for corporate
actions like mergers, amalgamations etc.
• The Act also provides for conversion of
existing partnership firm, private limited company and unlisted public company
into a LLP by registering the same with the Registrar of Companies (ROC).
Conclusion
Here I would like to conclude my article by saying
that there is no doubt that a LLP structure has a better tax planning options
however that should not be a criteria for a start up while selecting the best
legal entities.
BY,
UTKARSH KUMAR
UTKARSH KUMAR
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